nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒03‒22
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Buying Locally By George J. Mailath; Andrew Postlewaite; Larry Samuelson
  2. Consumer Choice as Constrained Imitation By Itzhak Gilboa; Andrew Postlewaite; David Schmeidler
  3. Optimal dynamic procurement contracts with monitoring and lumpy investment By Andreas Asseyer
  4. Memory, Attention and Choice By Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
  5. Piecewise Additivity for Nonexpected Utility By Craig S. Webb
  6. The value of information under unawareness By Galanis, Spyros
  7. The Expected Externality Mechanism in a Level-k Environment By Olga Gorelkina
  8. The Implementation Duality By Noldeke, Georg; Larry Samuelson
  9. Uncertain Rationality and Robustness in Games with Incomplete Information By Fabrizio Germano; Peio Zuazo-Garin
  10. A Unifying model of strategic network formation By Olaizola Ortega, María Norma; Valenciano Llovera, Federico
  11. The Principal-Agent Problem With Time Inconsistent Utility Functions By Boualem Djehiche; Peter Helgesson
  12. Voting by conforminy By Bernardo Moreno; María del Pino Ramos-Sosa
  13. Tenure-Track Contract Helps Self-Selection By Popov, Sergey V
  14. Formal and Real Power in General Equilibrium By Hans Gersbach; Hans Haller
  15. Dynamic Mechanisms without Money By Guo, Yingni; Hörner, Johannes
  16. Mechanism Design in the Presence of a Pre-Existing Game By Benjamin N. Roth; Ran I. Shorrer
  17. Managerial Turnover and Entrenchment By Zenan Wu; Xi Weng
  18. Thr Group All-Pay Auction with Heterogeneous Impact Functions By Subhasish M. Chowdhury; Iryna Topolyan

  1. By: George J. Mailath (Dept. of Economics, University of Pennsylvania); Andrew Postlewaite (Dept. of Economics, University of Pennsylvania); Larry Samuelson (Cowles Foundation, Yale University)
    Abstract: “Buy local” arrangements encourage members of a community or group to patronize one another rather than the external economy. They range from formal mechanisms such as local currencies to informal “I’ll buy from you if you buy from me” arrangements, and are often championed on social or environmental grounds. We show that in a monopolistically competitive economy, buy local arrangements can have salutary effects even for selfish agents immune to social or environmental considerations. Buy local arrangements effectively allow firms to exploit the equilibrium price-cost gap to profitably expand their sales at the going price.
    Keywords: Buy local, Local currency, Trading favors, Reciprocity, Monopolistic Competition
    JEL: D43 D85 L14 R12
    Date: 2015–03
  2. By: Itzhak Gilboa (HEC, Paris, and Tel-Aviv University); Andrew Postlewaite (Department of Economics, University of Pennsylvania); David Schmeidler (Tel-Aviv University, the Ohio State University, and the InterDisciplinary Center at rzliya)
    Abstract: A literal interpretation of neo-classical consumer theory suggests that the consumer solves a very complex problem. In the presence of indivisible goods, the consumer problem is NP-Hard, and it appears unlikely that it can be optimally solved by humans. An alternative approach is suggested, according to which the household chooses how to allocate its budget among product categories without necessarily being compatible with utility maximization. Rather, the household has a set of constraints, and among these it chooses an allocation in a case-based manner, influenced by choices of other, similar households, or of itself in the past. We offer an axiomatization of this model.
    Keywords: Imitation, case-based decisions, rules of thumb, Consumer choice, complexity
    JEL: D11
    Date: 2015–02–01
  3. By: Andreas Asseyer (Humboldt-Universitaet zu Berlin)
    Abstract: This paper studies optimal contracts and monitoring policies in procurement under dynamic adverse selection and moral hazard concerning a cost-reducing investment decision. I assume fixed costs of investment and show that the resulting 'lumpy' investment behavior creates a motive to monitor information that the supplier learns during the contractual relationship. The principal never monitors both the shock and the investment decision. Furthermore the principal is more likely to prefer to monitor the shock if the level of fixed cost of investment is high. Creation Date: 201502
    Keywords: procurement, lumpy investment, monitoring, dynamic information rents, dynamic contracts, dynamic mechanism design
    JEL: D82 D86 H57
  4. By: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
    Abstract: We present a theory of consumer choice that combines elements of limited recall and of allocationof attention distorted by salience. The theory helps clarify and organize a variety of evidence dealingwith consumer reaction to information, including surprises in quality and prices, unshrouding ofhidden attributes such as taxes or maintenance costs, and reminders. Our model explains howconsumers under or overreact to information, depending on what draws their attention. It also yieldsa normative analysis of reaction to reminders which adjusts the \sucient statistic" methodology.
    Date: 2015–03
  5. By: Craig S. Webb
    Date: 2015
  6. By: Galanis, Spyros
    Abstract: The value of information is examined in a single-agent environment with unawareness. Although the agent has a correct prior about events he is aware of and has a clear understanding of his available actions and payoffs, his unawareness may lead him to commit information pro- cessing errors and to behave suboptimally. As a result, the value of information can be negative, contrasting what is true in the standard model with partitional information and no unaware- ness. We show that the source of the agent’s suboptimal behavior is that he misunderstands the information revealed by his varying awareness, treating it asymmetrically. <br><br> Keywords; unawareness, value of information, uncertainty, knowledge, bounded perception, awarenes
    Date: 2015–01–23
  7. By: Olga Gorelkina (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Mechanism design theory strongly relies on the concept of Nash equilibrium. However, studies of experimental games show that Nash equilibria are rarely played and that subjects may be thinking only a finite number of iterations. We study one of the most influential benchmarks of mechanism design theory, the expected externality mechanism (D’Aspremont, Gerard-Varet, 1979) in a finite-depth environment described by the Lk model. While efficient implementation fails under certain conditions, our results provide a vindication of the mechanism in the convex quasi-linear environment with finitely-rational agents.
    Keywords: Bounded Rationality, Expected externality, externality mechanisms, Level-K
    JEL: D71 D82 C72
    Date: 2015–01
  8. By: Noldeke, Georg (University of Basel); Larry Samuelson (Cowles Foundation, Yale University)
    Abstract: We use the theory of abstract convexity to study adverse-selection principal-agent problems and two-sided matching problems, departing from much of the literature by not requiring quasilinear utility. We formulate and characterize a basic underlying implementation duality. We show how this duality can be used to obtain a sharpening of the taxation principle, to obtain a general existence result for solutions to the principal-agent problem, to show that (just as in the quasilinear case) all increasing decision functions are implementable under a single crossing condition, and to obtain an existence result for stable outcomes featuring positive assortative matching in a matching model.
    Keywords: Implementation, Duality, Galois connection, Imperfectly transferable utility, Principal-agent model, Two-sided matching
    JEL: C62 C78 D82 D86
    Date: 2015–03
  9. By: Fabrizio Germano; Peio Zuazo-Garin
    Abstract: Economic predictions are highly sensitive to model and informational specifications. Weinstein and Yildiz (2007) show that, in static games with incomplete information, only very weak predictions, namely, the interim correlated rationalizable (ICR) actions, are robust to higher-order belief misspecifications. This paper extends their robustness analysis to allow for higher-order uncertainty about rationality. We introduce interim correlated p-rationalizability (ICRp) as a solution concept for games with incomplete information. We first confirm the robustness of the ICR predictions to small departures from common belief in rationality by showing the continuity of ICRp actions at p = 1, where they coincide with ICR. At the same time, we show that Weinstein and Yildiz's (2007) deeper results on the structure of rationalizability, most notably, their discontinuity and generic local uniqueness properties, fail as soon as any arbitrarily small amount of higher-order uncertainty about rationality is introduced. Thus, we find that common belief in rationality is a necessary condition for Weinstein and Yildiz's (2007) discontinuity property to hold. Among other things, this reveals the diminishing strategic impact of higher-order belief constraints.
    Keywords: robustness, rationalizability, uncertain rationality, incomplete information, belief hierarchies
    JEL: C72 D82 D83
    Date: 2015–02
  10. By: Olaizola Ortega, María Norma; Valenciano Llovera, Federico
    Keywords: network formation, unilateral link-formation, bilateral link-formation, efficiency, stability
    JEL: A14 C72 D20 J00
    Date: 2015–02–17
  11. By: Boualem Djehiche; Peter Helgesson
    Abstract: In this paper we study a generalization of the continuous time Principal-Agent problem allowing for time inconsistent utility functions, for instance of mean-variance type. Using recent results on the Pontryagin maximum principle for FBSDEs we suggest a method of characterizing optimal contracts for such models. To illustrate this we consider a fully solved explicit example in the linear quadratic setting.
    Date: 2015–03
  12. By: Bernardo Moreno (Department of Economic Theory, Universidad de Málaga); María del Pino Ramos-Sosa (Department of Economic Theory, Universidad de Málaga)
    Abstract: A group of agents has to decide whether to accept or reject a proposal. Agents vote in favor or against the proposal and, if the number of agents in favor is greater to certain quota, the proposal is accepted. The \textit{socially optimal decision} is the one adopted when all agents vote truthfully. Conformist agents vote based not only on their opinion but also on the vote of other agents. Independent agents only care about their opinion. If all agents are conformists and vote simultaneously, for any quota there are undominated Nash equilibria where the socially optimal decision is not obtained. Next, we provide the number of independents needed for the socially optimal decision to be obtained in any equilibria. It depends on the total number of agents, the quota and the conformity measure. If agents vote sequentially, the socially optimal decision is obtained in any subgame perfect Nash equilibrium.
    Keywords: Basque-Elections; Conformity; Voting; Independent agents
    JEL: D71
    Date: 2015–03
  13. By: Popov, Sergey V
    Abstract: Tenure contract is criticized for curbing the incentives for spending effort after obtaining the tenured status. Yet, the best faculty seems to work on a tenure contract, and schools who employ the best faculty seem to prefer to offer a tenure-track contract to their new hires. I argue that tenure-track contracts are by construction more attractive to more able freshly minted PhDs, and therefore the observed sorting is rationalizable.
    Keywords: tenure, academia, job market, self-selection
    JEL: I23 J4
    Date: 2015–03–19
  14. By: Hans Gersbach (ETH Zurich, Switzerland); Hans Haller (Virginia Polytechnic Institute)
    Abstract: We integrate individual power in groups into general equilibrium models with endogenous group formation. We distinguish between formal power (the say in group decisions) and real power (utility gain from being in groups). Their values will be determined as part of the equilibrium. We find that higher formal power does not necessarily translate into higher equilibrium utility or higher real power. One reason is that induced price changes may offset the groupmember’s increased influence. A second reason is that the group may dissolve when a group member gains too much influence, because other members can exercise the option to leave. We also show that maximal real power can be compatible with Pareto efficiency. We further identify circumstances when changes of formal power in one group do not impact on other groups. Finally, we establish existence of competitive equilibria, including equilibria where some individual enjoys real power.
    Keywords: Group formation, competitive markets, power, exit
    JEL: D41 D50 D60
    Date: 2015–03
  15. By: Guo, Yingni (Northwestern University); Hörner, Johannes (Yale University)
    Abstract: We analyze the optimal design of dynamic mechanisms in the absence of transfers. The designer uses future allocation decisions to elicit private information. Values evolve according to a two-state Markov chain. We solve for the optimal allocation rule, which permits a simple implementation. Unlike with transfers, efficiency decreases over time, and both immiseration and its polar opposite are possible long-run outcomes. Considering the limiting environment in which time is continuous, we demonstrate that persistence hurts.
    Keywords: Mechanism design, Principal-Agent, Token mechanisms
    JEL: C73 D82
    Date: 2015–03
  16. By: Benjamin N. Roth; Ran I. Shorrer
    Abstract: We study a model of mechanism design in which the designer cannot force the players to use the mechanism. Instead they must voluntarily sign away their decision rights, and if they instead keep their decision rights they act on their own accord. We ask what social choice functions can be implemented uniquely in this setting. We show that when there is no incomplete information among the players our analysis differs little from that of the standard framework. However when there is incomplete information among the players we identify examples in which many social choice functions which are uniquely implementable in the standard framework cannot be implemented uniquely in ours. In some cases, simple mechanisms intended to produce desirable equilibria also produce equilibria with very bad welfare properties. We see this as a caution to applications of the standard analysis to the design of real markets.
    Date: 2015–03
  17. By: Zenan Wu (Department of Economics, University of Pennsylvania); Xi Weng (Guanghua School of Management, Peking University)
    Abstract: We consider a two-period model in which the success of the firm depends on the effort of a first-period manager (the incumbent) and the ability of a second-period manager. At the end of the first period, the board receives a noisy signal of the incumbent manager's ability and decides whether to retain or replace the incumbent manager. We show that the information technology the board has to assess the incumbent manager's ability is an important determinant of the optimal contract and replacement policy. The contract must balance providing incentives for the incumbent manager to exert effort and ensuring that the second-period manager is of high ability. We show that severance pay in the contract serves as a costly commitment device to induce effort. Unlike existing models, we identify conditions on the information structure under which both entrenchment and anti-entrenchment emerge in the optimal contract.
    Keywords: entrenchment, managerial turnover, contracting, information order
    JEL: D86 J33 M52
    Date: 2015–03–18
  18. By: Subhasish M. Chowdhury (University of East Anglia); Iryna Topolyan (University of Cincinnati)
    Abstract: We analyze a group all-pay auction with a group specific public good prize in which one group follows a weakest-link and the other group follows a best-shot impact function. This type of game depicts situations in which the best-shot group is an attacker and the other group is a defender. We show that when the per-capita valuations are equal across groups, there exists a continuum of mixed strategy equilibria in which both groups randomize continuously without a gap over the same interval whose lower bound is zero. There are two further types of equilibria with discontinuous strategies. For the first type, each player in the best-shot group puts mass at the upper bound of the support whereas each player in the other group puts mass at the lower bound of the support. For the second type, players in the best-shot group put masses at both the lower and the upper bounds, while the other group randomizes without an atom. If players in the best-shot group could coordinate on the mass they put at the upper bound of the support, they would want to make it as large as possible (within the relevant range).
    Date: 2015–03

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